Global / China Internet Trends
Shantou University / Cheung Kong Graduate School of Business / Hong Kong University
November 7, 2005
[email protected] [email protected]
1 Outline
• Attributes of Winning Companies • Global Internet • China Internet • Your Questions
2 Attributes of Winning Companies
3 Attributes of Winning Companies…
1. Large market opportunities - it is better to have 10%, and rising, market share of a $1 billion market than 100% of a $100M market 2. Good technology/service that offers a significant value/service proposition to its customers 3. Simple, direct mission and strong culture 4. Missionary (not mercenary), passionate, maniacally-focused founder(s) 5. Technology magnets (never underestimate the power of great engineers) 6. Great management team / board of directors / committed partners 7. Ability to lead change and embrace chaos 8. Leading/sustainable market position with first-mover advantage 9. Brand leadership, leading reach and market share 10.Global presence
4 …Attributes of Winning Companies
11. Insane customer focus and rapidly growing customer base 12. Stickiness and customer loyalty 13. Extensible product line(s) with focus on constant improvement and regeneration 14. Clear, broad distribution plans 15. Opportunity to increase customer “touch points” 16. Strong business and milestone momentum 17. Annuity-like business with sustainable operating leverage assisted by barriers-to-entry 18. High gross margins 19. Path to improving operating margins 20. Low-cost infrastructure and development efforts
5 Global Internet
6 Internet Data Points: Global…
Global N. America = 23% of Internet users in 2005; was 66% in 1995
S. Korea Broadband penetration of 70%+ - No. 1 in world
China More Internet users < age of 30 than anywhere
7 …Internet Data Points: Communications…
Broadband 179MM global subscribers (+45% Y/Y, CQ2); 57MM in Asia; 45MM in N. America
Mobile 1.1T SMSs sent with $50B in revenue in 2004 (Informa 5/05); Messaging more emails sent in Japan via mobile than PC (DoCoMo 2005)
61MM registered Skype users (10/05) - fastest product ramp VoIP ever?
Denmark VoIP minutes > landline voice minutes
Tencent 16MM peak simultaneous Instant Message users, China, CQ2
8 …Internet Data Points: Content…
7.6B global searches (+74% Y/Y, 5/05); 384MM global unique Google visitors (+36%, 5/05) per comScore
Personalization 40MM+ estimated My Yahoo! users
Blogging 27% of US Internet users read blogs, 11/04
Yahoo! ~1.6B streaming video (music…) sessions (+100% Y/Y, CQ3)
695MM cumulative iTunes as of 9/05; 7MM iPods sold in Digital Media CQ3:05 (+220% Y/Y); 1MM videos sold in 20 days (10/05)
$3B annualized ringtone sales (Informa 5/05) - vs. $495MM Ringtones cumulative iTunes sales (7/05)
9 …Internet Data Points: Payments
PayPal 87MM accounts (+53% Y/Y, CQ3); 25MM users (+41% Y/Y)
Mobile Payments 4MM+ NTT DoCoMo wallet phone users (CQ1) in Japan
10 Top 5 Global Internet Market Cap Leaders
Google + Yahoo! + eBay + Yahoo! Japan + Amazon.com
• $ 2B = market value - pre-2000 IPO
• $178B = market value - Nasdaq peak – 3/10/00
• $ 32B = market value - Nasdaq trough – 10/9/02
• $273B = market value - 10/28/05
For Google we include $100MM in post-money valuation
11 Significant Infrastructure Builds…
Capital Expenditures
(US$ in Millions) C2003 C2004 C2005E Google $177 $319 $796 Y/Y 375% 80% 150% Yahoo! $117 $246 $405 Y/Y 128% 109% 65% eBay (1) $365 $293 $381 Y/Y 163% (20%) 30% Amazon.com $46 $89 $200 Y/Y 17% 94% 124%
Source: Company filings, Morgan Stanley Research. Figures exclude capital expenditures from acquired companies. (1) C2003 includes $125.1MM purchase of additional office space. E = Morgan Stanley Research estimates.
12 …Significant Infrastructure Builds
To organize all the world’s information and make it universally accessible and useful.
-Google’s Mission Statement
13 Communications Changing / Being Changed
1975 2005 Mobile VoIP IM
Pace of innovation across communication devices, services and networks continues to rise
Landline Phone
Email Blogs
14 Communications = 44% (& Rising) of US Online Usage
100% 90 80 70 60 50 Communications 40 30 20 % of Time Spent on Activity % of Time Spent 10 0 Email IM Voice Browsing / Discussion / Search Other Chat
Source: comScore Media Metrix, based on average minutes per visitor by category (8/05). Browsing / Other includes general web-surfing activity not listed in other categories, including anything from news sites (cnn.com) to retail (Amazon.com) to job sites.
15 Hierarchy of Needs?
1943 - Maslow 2005 - ? ;)
Self- actualization Internet / Mobile Phone Esteem
Belonging Shelter
Safety
Food / Water Physiological
Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate.
16 Global Users / Innovation
Internet Users – 1B Mobile Subscribers – 2B C2005E (1) C2005E (2)
N. America N. America 11% South 23% South America America 11% 5% Europe 19% Europe 24% ROW 12%
Asia ROW Pacific 18% 36% Asia Pacific 41%
(1) Source: Morgan Stanley Research. (2) Source: Morgan Stanley Communications Equipment Research: Scott Coleman, John Marchetti.
17 In / Entering Major Computing Cycles
4 major computing cycles over past 50 years Mainframe Æ Minicomputer Æ PC Æ PC Internet (Narrowband)
In / entering 2 most profound cycles ever PC Internet (Broadband) Æ Mobile Internet
Why now? 1) Broadband becoming pervasive 2) Internet-enabled mobile devices becoming pervasive - in effect, becoming small / functional computers 3) Global technology innovation may be at all time high
18 Broadband Becoming Pervasive
80 60%
70 Broadband Ramp in 50% 60 25-30% Penetration Sweet Spot… 40% 50
40 30% (MM) 30 20% 20 10% 10
US Residential Broadband Households Households Broadband Residential US 0 0% 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E 2011E
US Residential Broadband Households % of Total US Households
Morgan Stanley Research.
19 Mobile Broadband in Early Stages
Global 2.5G / 3G Penetration 1,600 60%
1,400 50% 1,200 40% 1,000
800 30%
600 20% Subscribers (MM) 400
10% % of Total Wireless Subscribers 200
0 0% 2005E 2006E 2007E 2008E 2009E
2.5G Subscribers 3G Subscribers % 2.5G Penetration % 3G Penetration
Source: Morgan Stanley Telecom, Internet Research.
20 Broadband vs. Mobile Internet Revenue Composition?
Top 10 Internet Companies - Revenue Composition Revenue Composition - Mobile Internet CQ2 Annualized - $28B C2005E - $19B
Payments 3% Music & Video Personalization (1) 4% Games 35% 10% Advertising Gambling 36% 1%
Search / 411 Commerce 16% Other Info & 61% Infotainment Enterprise 24% Services 10%
Source: Left Chart - Morgan Stanley Research estimates: includes revenue from Google, eBay, Yahoo!, Yahoo! Japan, Amazon.com, T-Online, InterActive, Time Warner (AOL only), Microsoft (MSN only), and Rakuten. Right Chart – Morgan Stanley Research estimates, Global Data. Informa (5/05), Ovum (5/05). (1) Personalization includes ringtones, wallpapers, and screensavers. If SMS / MMS were added to Mobile Internet—it would add $55B to total revenue and would account for 74% of total revenue.
21 Global Internet Thesis
10-15% user growth
20-30% usage growth
30%+ monetization growth
22 China Internet
23 China Internet
China Internet
Potential to reach more Most consumers + Chinese consumers than = Size (1.3B) other industries
Fastest growing economy Fastest growing (19x GDP expansion + industry in China = Growth over past 20 years)
24 -1- Growing Faster than Other Markets…with More Potential
• China leads world in mobile subscribers • China ranks No. 2 in Internet users • More Internet users under the age of 30 than any other country • Growth drivers for Chinese Internet have been / are robust
25 -2- China Internet is Mobile vs. PC-Centric
Mobile Users Internet Users Mobile Phone to Installed PCs Country (MM) (MM) Internet User Ratio(MM) China 363 100 3.6:1 53 US 177 211 0.8:1 207 Japan 88 78 1.1:1 55 Germany 69 51 1.4:1 39 UK 54 37 1.5:1 26 Italy 54 32 1.7:1 16 S. Korea 37 32 1.2:1 27
Euromonitor, CNNIC, World Bank, Morgan Stanley Research (July 2005)
26 -3- Internet Helps Bring About Cultural Evolution
Pre-Internet Age Post-Internet Age
Status Gaping holes Filling in holes Information Regulated (Top 10 Newspapers all Portals (Sina, Sohu)- alternative state-owned) news sources Only 8 model movies during the New entertainment formats, such Entertainment Cultural Revolution as Online Gaming (Shanda, NetEase) Interaction Deficient due to one-child policy Instant messaging (Tencent) and MVAS (TOM Online, Sina) offer connectivity
Source: Morgan Stanley Research.
27 -4- Foreign Interests Accelerating
Foreign Entrants Local Targets Dates Transaction Type Market Position of Target eBay EachNet Jul-03 Acquisition No. 1 in online auction
Yahoo! 3721.com Nov-03 Acquisition No. 2 in paid search
Google Baidu Jun-04 Bought 3% Stake No. 1 in paid search
InterActive eLong Jul-04 Bought 30% Stake No. 2 in online traveling
Amazon.com Joyo Aug-04 Acquisition Leading ecommerce store
Monster.com ChinaHR Feb-05 Bought 40% Stake No. 2 in online recruiting
Yahoo! Alibaba Aug-05 Bought 40% Stake No. 1 in B2B marketplace
Source: Morgan Stanley Research (Market positions were based on our estimates on the dates of transactions)
28 -5- Mergers and Acquisitions Active
Vertical integration ‘Hostile’ share purchase ‘Poison Pill’ Shanda vs. Sina Sina vs. Shanda • TOM Online bought Puccini • Sina acquired Memestar & Crillion • Sohu acquired ChinaRen, Focus.net, and 17173.com Horizontal China Internet • Shanda purchased PC game/ mobile game/ casual game integration companies
29 -6- A League of Big Players
Industry Companies Industry Rank Market Share Online Advertising Sina No. 1 30% Sohu No. 2 25% Total share = 55% of industry rev
Online Gaming Shanda No. 1 39% NetEase No. 2 18% Total share = 58% of industry rev
MVAS Sina No.1 16% Tom Online No. 2 15% Tencent No. 3 10% Total share = 41% of industry rev
Instant Messaging (IM) Tencent No. 1 77% of IM users
Online Auction eBay EachNet No. 1 65% plus Alibaba/ Taobao No. 2 29% plus Total share = 94% plus of GMV
Sources: Company date (2004), IResearch, Morgan Stanley Research; GMV- gross merchandise value
30 -7- Leadership Positions Not Necessarily Secure
Sales ($MM) 2Q2003 2Q2004 2Q2005 MVAS Sina 14 31 23 TOM Online - 29 41 as % of Sina - 93% 180%
Online Gaming Shanda 17 35 56 Narrowing gaps NetEase 4 16 40 or as % of Shanda 24% 46% 70% Change in leadership g SinaOnline Advertisin 10 16 20 Sohu 71317 as % of Sina 72% 86% 83%
Sources: Company date, Morgan Stanley Research
31 -8- Purer Players Tend to Have Higher Market Share
Industry Business-line as % of Industry Companies Rank in the Industry company’s revenue
Online Gaming Shanda No. 1 87% NetEase No. 2 83 Online Advertising Sohu No. 2 66
MVAS TOM Online No. 1 95
Company date, Morgan Stanley Research (Estimates are based on 2Q2005 results)
32 -9- Regional Focus Can Vary
Distribution of Chinese Internet Users • Geographical concentration • Chinese Internet users are
2.9% concentrated in coastal areas Beijing (56% of total, 2004, CNNIC) 4.3% 1.0 % 1.9% 3.4% 1.3% • Top 4 cities contribute 50% plus Tianjin 2.1% 3.6% of advertising sales 2.2% 0.3% 9.0% 0.2% • Top 5 cities accounted for 60% of 1.3% 2.8% 3.2% 7.0% Shanghai Ctrip’s hotel sales and 80% of its 0.1 % 4.6% 2.6% 4.7% 5.6% 5.7% air ticket sales volume, 2004 1.7% 3.3% 3.5% West China 1.0% 2.2% • Geographical dispersion 19% 3.0% 12.6% Coastal China • IDC estimates that 80%+ of 56% 0.5% online gamers came from non-top
Source: CNNIC tier cities (2003)
33 -10- Content Becoming King
• Content providers gaining pricing power
− TOM Online paying out 40-50% of revenue to music companies for distribution rights
− KongZhong paid 5x more for wireless distribution rights for leading blockbuster movie vs. 2 years ago
− Foreign game developers, such as Actoz and Blizzard, command multiple fold higher licensing payment vs. several years ago
• Rollout of new wireless and broadband services creates demand for quality content − China Mobile’s color ringtone users have expanded at quarterly compound rate of 90% over past 1.5 years − Most popular song, ‘Mouse Loves Rice,’ downloaded 5MM times in 2004 with potential profits exceeding the best-selling CDs − Content providers, such as MTV, may produce more revenues from MVAS than from pay TV in a few years
34 Challenges
• Ecommerce / payment adoption in China • Economic hard landing or soft landing? • Long-term value vs. short-term profit • Expect the unexpected! • China’s current business environment is more favorable to SOEs than start-ups, especially in areas like regulation and financing • Hollowing of management – founder mentality • Dearth of innovation • Too much capital, too few good ideas • All in, global / China, opportunities are significant as are dislocations and risks…
35 Your Questions
36 Disclaimer
Important US Regulatory Disclosures on Subject Companies The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Mary Meeker - Amazon.com (common stock), Yahoo! (common stock), Microsoft (common stock), eBay (common stock);. Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of September 30, 2005, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Amazon.com, eBay, Google, Sina Corporation, Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Google. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay, Google, Microsoft, Sina Corporation. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, eBay, Google, Microsoft, Sina Corporation, Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from eBay, Microsoft. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following companies covered in this report: Amazon.com, eBay, Google, Microsoft, Sina Corporation, Yahoo!. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following companies covered in this report: eBay, Microsoft, Netease.com, Sina Corporation. An employee or director of Morgan Stanley & Co. Incorporated and/or Morgan Stanley DW Inc. is a director of Microsoft, Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, Ctrip.com, eBay, Google, Microsoft, Netease.com, Sina Corporation, Sohu.com Inc, Tom Online, Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
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37 Disclaimer
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